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The state government of Kerala in India announced on 14 January
that it had launched a challenge in the Supreme Court to the
Citizenship (Amendment) Act (CAA), passed by the Parliament of
India on 11 December 2019. This increases the risk of disputes
between the central government led by Prime Minister Narendra
Modi's Bharatiya Janata Party (BJP) and non-BJP state governments,
likely increasing protests and delaying compensation to states.
Opposition to the CAA by India's state governments is increasing
the risk of prolonged disputes between the central and state
governments. Prior to the challenge by the Kerala state government,
India's main opposition Indian National Congress party announced on
9 January that the central government should withdraw the CAA. As
of January 2020, up to 10 state governments have opposed the
implementation of the CAA within their jurisdictions. These include
non-BJP state governments, but also involves states governed by
parties allied with the BJP, such as Assam, governed by the Assam
People's Association (Asom Gana Parishad: AGP), and Bihar, led by
the Janata DalUnited (JD-U) party. Given that 'citizenship' falls
under the jurisdiction of the central government, it is likely that
Prime Minister Modi will pursue strong measures to force
implementation of the CAA despite states' opposition. The dispute
most likely will advance to the Supreme Court, with a low
probability, high impact scenario in which the central government
proposes the imposition of the president's rule in states that
oppose the measure, most likely states with non-BJP
governments.
As well as over the CAA, disputes between the central and state
governments will likely worsen because non-BJP state governments
were already criticising the central government during 2019 over
delayed payments due to them under the Goods and Services Tax
(GST). Media reports indicate that the central government is at
risk of defaulting on GST compensation to the states by February
2020. The August-September 2019 payments were made only in
mid-December. IHS Markit data also show that India's net tax
revenue fell year on year from fiscal year (FY) 2018/19 to FY
2019/20, while total expenditure increased. The delays have come as
GDP growth slowed to its lowest in more than six years: IHS Markit
now projects only 4.8% GDP growth for the fiscal year to 31 March
2020, down from 6.8% for FY 2018/19. In addition to GST
compensation - and as a probable retaliation for opposition to the
CAA - the central government is likely to hold back other payments
due to the states that fund welfare projects, such as for
education, health, rural unemployment, and disaster relief. This
increases the likelihood that state governments will sue the
central government at the Supreme Court for GST payments.
Escalating central and state government disputes hold the
potential to fracture India's policy-making environment beyond the
one-year outlook, requiring companies to comply with different
rules depending on collaboration with the central government or
with non-BJP state governments. These disputes will most probably
be manifested as non-BJP state governments seeking to reverse
consolidation of executive power in Prime Minister Modi's
government since 2014. This will be facilitated by losses for the
BJP in state-level elections: as of December 2018, the BJP formed
21 state governments in India; as of January 2020, this had
decreased to 13 states. Likely most affected are the infrastructure
and manufacturing sectors, as well as the operationalisation of
special economic zones. Furthermore, non-BJP state governments are
also likely to pursue state-specific land acquisition legislation,
minimum wage policies, and tax concessions.
Indicators of changing risk environment
Increasing risk
State elections are due in February 2020 in Delhi (controlled
by a non-BJP government) and in October 2020 in Bihar (where the
BJP governs in alliance with the JD-U), in which a loss for the BJP
would indicate that the CAA is further diminishing the electorate's
approval of the party, likely encouraging more BJP and non-BJP
governed states to demand withdrawal of the CAA.
The central government likely will delay payments to states
which, in addition to opposing the CAA, also start opposing the
National Register of Citizens (NRC) and/or stop work on the
National Population Register (NPR), which are considered as the
next steps to the CAA by the opposition.
If the central government defaults on its GST payment
obligations, the states will be more likely to sue the central
government, and not demand GST rates are increased.
Decreasing risk
If the Supreme Court rules in favour of the Kerala state
government's petition on the constitutionality of the CAA, it will
significantly de-escalate the avenues for states' opposition to the
central government.
If the central government officially announces a temporary stop
to work on the NRC and the NPR, it will likely limit the protests
and states' opposition to central government policy.
Posted 22 January 2020 by Deepa Kumar, Senior Analyst – Asia-Pacific Country Risk, IHS Markit